Revisions to ISA (UK) 600 and the impact on group audits

The revisions to ISA (UK) 600 came into force for audits of accounting periods commencing on or after 15 December 2023. In the majority of cases, audits of groups with a year-end of 31 December 2024 will be the first under this new standard. In this article, Gemma Archer looks at the main changes in the ISA and why it is about more than just component auditors.

When discussing the changes to ISA (UK) 600 with firms over the past year, a common response has been: ‘We don’t need to worry about that, as we don’t use component auditors.’

This highlights a common misconception that ISA (UK) 600 is only applicable where an audit involves component auditors. In fact, the full name of the ISA – Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors) – serves as a reminder that ISA (UK) 600 is applicable to all group audit engagements. The key changes are detailed below:

Interaction with ISA (UK) 220 Quality Management for an Audit of Financial Statements

Several of the changes made to ISA (UK) 600 are to align the standard with ISA (UK) 220. These changes have been made to align the definition of engagement team with the requirement of the group engagement partner to ensure there are sufficient resources on the engagement throughout, to drive quality through the group, including at the component level and for the group risk assessment process to be effective.

Proactive risk-based approach

The revisions to the ISA promote a ‘top-down’ approach to risk assessment, focussed on identifying and assessing the risk of material misstatement for the group as a whole, planning the approach to the group audit and performing audit procedures that responds to the assessed risks wherever the risks are located within the group.

This ensures that the group as a whole is at the heart of the approach, rather than a ‘bottom-up’ approach that considers the risks in each component, which may result in a loss of focus on the group.

Revisions to the definition of ‘component’

Under the previous iteration of the ISA, the definition of ‘component’ was predicated on the way in which the entity arranged itself, being ‘an entity or business activity for which group or component management prepares financial information that should be included in the group financial statements’.

The revised ISA now places the onus on the auditor to make the judgement of what should be defined as a component, referring to ‘an entity, business unit, function or business activity, or some combination thereof, determining by the group auditor for purpose of planning and performing audit procedures in a group audit’.

Removal of the concept of a ‘significant component’

The changes to the overall approach to focus on the group as a whole have necessitated the removal of the concept of ‘significant components’. The focus of the group audit team should be on the risks of the group, regardless of where they fall, and therefore there is no longer a need to consider the significance of components themselves. Instead audit work should be focused on those account balances, classes of transactions and disclosures where a risk has been identified.

Communication between group and component auditors

The revised ISA (UK) 600 makes it clear that the group engagement partner is responsible for the group audit opinion and this includes the work performed by component auditors. The revised standard emphasises the need for component auditors to be directed by the group engagement partner. Communication is fundamental to this arrangement and there is now, even more so than previously, a clear requirement for effective two-way communication between the group auditors and the component auditors.

Enhanced documentation requirements

Various changes to the ISA emphasise the importance of professional judgement and thorough documentation. This includes:

• documentation of two-way communication amongst the engagement team (including with component auditors)
• conclusions on group audit risks, drawing on evidence from the work completed across group components
• how the group engagement partner has concluded on any areas of significant judgement.

Audit firms involved in group audits must ensure they have familiarised themselves with the revised standard and have made any adjustments required to their audit approach.